Aptos Skyrocketed 6 Times In A Month, Is It Just An Empty Game?

Not every pump has a pattern or reason. That being said, it’s hard to ignore the January growth of APT, the token associated with venture capital (VC) darling blockchain startup Aptos Labs. Let’s take a closer look at this pump and try to answer whether we should salivate at this opportunity or dismiss it.

What’s up with Aptos?

During every cryptocurrency rally, whether at the peak of a bull market or in the throes of a bear market, we ask ourselves the same question: Why is a project whose fundamentals look questionable skyrocketing?

In many cases, this is a valid question. While crypto asset analysis has matured considerably over the past few years, several of the largest coins by market capitalization are still pegged to projects with limited usage.

Dog-themed tokens like. DOGE and SHIB are the winners of the 2021 “Most Headache Pump” award. The frontrunner for this ignominious honor from 2023 has to be Aptos (APT), which is up over 450% year-to-date and has been the best-performing asset in the top 200. The network now has a fully diluted valuation (FDV) of $19 billion, the sixth-highest among all crypto projects and nearly 10% of Ethereum’s.

One of the most popular projects of 2022, this pump has emerged despite Aptos’ limited traction thus far. It is currently the 31st network by TVL, worth $62.05 million, behind “lightly used” networks such as EOS and Cardano.

Which brings us back to the never-ending question, why is this project with seemingly questionable fundamentals skyrocketing?

Let’s explore and see if we can find out.

Aptos overview

Aptos is an L1 developed by a former engineer for Facebook’s Diem project. The main value proposition of the network is scalability, claiming to be able to handle 10,000 TPS while aiming to reach 100,000 TPS. Aptos also uses the Move programming language, which has been praised by developers for its security features and ease of use.

Aptos is also known for its massive overvalued venture funding, raising $200 million in March 2022 at a valuation of over $1 billion and $150 million in July 2022 at a valuation of over $2 billion. It’s worth noting that these rounds were largely participated by the now-defunct FTX Ventures. Additionally, Binance’s follow-on investment in September last year valued the L1 at over $4 billion.

Launched in October 2022, Aptos was valued at $13 billion on the day it went live.

Markets plummeted after the FTX crash, but APT and other “Sam coins” were hit harder, falling over 55% between Nov. 7 and Dec. 29. Its December low of $3 valued the network at about $3.1 billion in FDV, down from its most recent funding round.

The sentiment is gloomy across the market, and APT, in particular, is radiant given its limited usage and the threat of prolonged selling pressure from the bankruptcy of its largest investor.

Killer of shorts

The short sellers smelled blood and started pouring in without any surprise. In the weeks following the FTX and Alameda debacles, APTs’ annualized funding rates sometimes dipped into negative triple digits. This means that the demand for shorting APT is so great that traders are actually willing to pay triple-digit annualized interest for it.

It was an extremely crowded trade, and its nominally extremely negative positioning set the stage for a massive short squeeze when the market started to turn.

Since January 8, the price of APT has skyrocketed over 360% from $3.8 to $18.2. The gut-wrenching rally left “a pile of short corpses” in its wake, with $112 million in short positions liquidated during the period, compared with $64 million in long positions.

Just as the fuel provided by long liquidations can exacerbate a downtrend, short liquidations can have a similar effect in the opposite direction, adding rocket fuel to the pump.

We can see from these numbers above that Aptos has a lot of fuel in an illiquid market that is still affected by FTX. The situation was further complicated by the fact that bears appeared to be opting to counter the move by shorting heavily, as APT funding fell into extreme negative territory again, with an annualized yield low of -136% on January 25.

It’s probably not just Aptos bears being blown out of breath by this gigantic pump. It is conceivable that Aptos’ own investors may also be among the victims, as those looking to hedge their paper profits may have shorted APT perps. Given the opaque nature of CEX, we are only speculating here.

With APT investors not able to start unlocking until October 2023, the token also benefits from having no structural sellers to drive down the price. If January’s performance is any indication, it also means that any VCs using APT perps for their hedges face a long and dangerous road ahead.

What happens next

As we’ve seen, there’s a simple and sound reason why APT saw huge volatility at the start of the year: it experienced a good old-fashioned short squeeze.

In the short term, positioning and market structure override fundamentals. APT is so oversold that traders sometimes pay triple-digit annualized amounts to be short it. The unwinding of these bearish bets created sharp price action, but up rather than down, as we have become accustomed to over the past year-plus.

Beyond this move, it’s unclear what the future holds for Aptos. Like many L1s, perhaps this backlash is reflexive, spurring more users, developers, and liquidity to migrate to the network.

So far, we haven’t seen much evidence that this is happening, although there are some encouraging signs. While monthly active addresses are down slightly in January 2023 compared to December 2022, both transaction volume and market capitalization of stablecoins on the network are expected to increase slightly.

In order for the APT to have a chance of supporting its massive FDV over the long term, it needs to increase these metrics significantly in the coming months (before VC unlocking kicks in). It may seem like a tall order, but hypergrowth is always possible in the cryptocurrency space.

It’s unclear whether this short squeeze is over or if there will be more pain for the bears. But regardless of the price, fundamental investors need not be nervous given the technical nature of the move. There are still some investors who are concerned about the surreal nature of this rally, and they have also warned of an upcoming wave that could occur if the overall market price declines.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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Harold

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